Specialty Restaurants Limited is a fine dining operator in India, with 69 restaurants and 13 confectionaries in 22 cities as of February 29, 2012, focused on providing guests an affordable fine dining experience with quality food and service in a modern ambience.

The promoters launched the first restaurant in 1992 under the name Only Fish, which was later renamed Oh! Calcutta in 1996. In 1994, the promoters launched the first Mainland China restaurant in Mumbai. They own and operate 49 restaurants and 13 confectionaries and have franchise arrangements for the other 20 restaurants. Most of the restaurants are located in Western India.

Objects of the issue

Development of New Restaurants

Development of Food Plaza

Repayment of Term Loan

Valuation Concerns - No Room for Error

Based on the company's projections of same store sales growth of 12% and addition of around 16 new restaurants it expects revenue growth of over 30% in FY13. Revenue growth coupled with margin expansion due to a weak commercial property market should lead to falling rental costs and an impressive growth in profits. But the issue price has factored in this growth and leaves little margin for errors.

Industry Overview: Organized Food Services Industry Growing over 25%

Entry of international chains has spurred domestic players to become more organized and responsive to the changing needs of customers. In the fast evolving food services industry, existing players are spending more resources on revamping their branding, improving efficiency and growing economies of scale in order to maintain competitiveness and increase market presence. International cuisines are moving toward the midmarket pricing segment rather than the top tier pricing segment, traditionally found in five-star hotels serving international cuisines. Full-service restaurants will likely remain standalone as mall developers are expected to encourage kiosks and food courts that house multiple establishments (Source: NRAI Report 2010).

SRL's Operations:

Marquee brands: Specialty Restaurants has several brands but its key revenue contributors are Mainland China and Oh! Calcutta. Their other restaurant brands are Sigree, Flame & Grill, Haka, Just Biryani, Kibbeh, Kix, Machaan, Shack, as well as a confectionary brand, Sweet Bengal.

Experienced Management: The management has over 19 years of experience in catering to guest tastes and has successfully developed multiple brands. The promoter has first-hand knowledge and experience of working in fine dining restaurants, having obtained a diploma in hotel management and having trained as a management trainee at a leading five star hotel in India.

Location Strategy: Mainland China is in over 22 cities and a majority of its revenues originate from Western India. The firm is focused on metros and Tier-1 cities & selectively expanding into Tier-2 towns.

Scalability: All the properties are leased and the company follows an asset-light model. This will allow the company to expand quickly. It leverages the Mainland China brand by combining it with other brands of the company. It has also grown through the Franchise Owned, Company Operated model.

New Brand Development: The company is focused on the urban middle class segments and has a good sense of the consumer's evolving palette. They are selecting appropriate niches to expand into such as Lebanese and Italian restaurants.

Risks to Growth

Negative Publicity: SRL and all restaurant businesses are vulnerable to negative publicity and health issue campaigns. These can quickly harm the brand value.

Rising Costs for Interior & Capital Improvements: Inflation in the cost of construction materials will adversely affect SRL's margins and its rate of expansion.

Conclusion / Investment Strategy

Price Leaves Little on the Table for Investors

We recommend that investors avoid subscribing to the IPO of Specialty Restaurants Ltd as the issue price is too high for our comfort. The price is at 23 to 25 times our FY13 earnings estimate of Rs 6.2. Long term investors should keenly track the company going forward due to its valuable brands such as Mainland China and a track record of consistent growth. The stock should be accumulated at lower valuations in the secondary market.

Review By K.M. Global Financial Services Ltd on May 16, 2012

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